1. Field of the Invention
This invention relates to data processing systems for managing investment accounts. More particularly, the present invention relates to systems and methods to implement an investment portfolio which covers the risk of transients in a market adverse to a particular investment portfolio.
2. Background of the Invention
Professional investment managers know that even well-designed portfolios can suffer sudden and unexpectedly large losses. Often these situations arise when elements of a portfolio unexpectedly “line up” or become highly correlated in combination with a loss situation.
A Financial Risk Cover (FRC), also referred to simply as a “Cover” in the financial market, is a combination of “futures” and “forwards” (exchange traded financial instruments) which has a specified response to the changing behavior of the portfolio that the Cover is designed to accompany. An FRC is often compared to an “overlay”. FRC's are not developed apart from their accompanying “Client” portfolio or “Client” asset.
Some useful definitions for the purposes of this disclosure are:                (a) futures: Commodities or securities contracted for delivery at a stated future date at a specified price. Such a contract (called futures contract) itself can also be traded. (Source: the Business Dictionary at http:<slash-slash>www<dot>businessdictionary<dot>com)        (b) forwards: A contract obligating one party to buy and another other party to sell a financial instrument, equity, commodity or currency at a specific future date. (Source: Invesior Words Glossary at http:<slash-slash>www<dot>investorwords<dot>com)        
At any given moment in time, an FRC can be liquidated for a tangible and useful cash value, as can be a client portfolio of investments with which an FRC is associated.
Traditionally, statisticians have believed that accounting for all possible combinations of transient market behavior in the design of an FRC was impossible or impractical, and therefore their profession has developed numerous methods of accommodating the uncertainties inherent therein.
According to conventional wisdom in the industry, portfolio managers believe that reliance on “trailing measures” of overall FRC performance (e.g., correlations between elements within the FRC and/or external financial measures) can only identify problems with FRC design far too late to effectively avoid problems.